Fiscal Implications, Misspecified Dynamics, and International Spillover Effects across Europe: A Time-varying Multicountry Analysis

Nowadays, macroeconomic-financial analyses and policy evaluations have given new stimulus to the study of business cycles, shock transmission, and policy-making. In this paper, a time-varying Structural Panel Bayesian VAR (SPBVAR) model is assessed in order to study international spillover effects, financial integration, and fiscal implications in multicountry dynamic panel setups. The SPBVAR model contains 20 country-specific models, including the United States, 12 European advanced economies, and 7 European emerging economies. Homogeneity, commonality, and interdependence are also identified in a unified framework, with particular emphasis on the recent financial crisis and successive consolidation periods. Evidence reveals heterogeneity across countries, but with a considerable common component because of consistent interdependencies. The results indicate that the intensity of spillovers sufficiently decreases behind more coordinated fiscal actions. Nevertheless, additional economic and institutional factors needed to be addressed in order to jointly deal with unobserved heterogeneity and model misspecification problems.